Hedging Transactions and Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Hedging Transactions and Derivative Financial Instruments

Note 3 – Hedging Transactions and Derivative Financial Instruments

The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities in the condensed consolidated statements of financial position at fair value.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for special hedge accounting treatment as defined under the applicable accounting guidance.  For derivative instruments that are designated and qualify for hedge accounting treatment (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income.  This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statements of comprehensive income associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.  The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item, the ineffective portion, if any, is recognized in the condensed consolidated statements of comprehensive income during the current period. 

As of the end of the first quarter of 2012, we have two contracts in place to hedge our exposure related to the purchase of copper at our German subsidiary, Curamik.  These contracts are held with financial institutions and minimize our risk associated with a potential rise in copper prices.  These two contracts cover our 2012 monthly copper exposure and qualify for hedge accounting treatment (therefore, any mark-to-market adjustments on these contracts are recorded in Other Comprehensive Income in the equity section of our consolidated statements of financial position).

We also have one contract related to minimizing our foreign currency exposures on our condensed consolidated statements of financial position.  This contract does not qualify for hedge accounting treatment, and any mark-to-market adjustments are recorded in our condensed consolidated statements of comprehensive income in Other Income, Net at March 31, 2012.

Notional Values of Foreign Currency Derivatives		Notional Value of Copper Derivatives
Japanese Yen	¥ 20,000,000	Copper	70 metric tons per month

(Dollars in thousands)	The Effect of Current Derivative Instruments on the Financial Statements for the three-month period ended March 31, 2012				Fair Values of Derivative Instruments as of March 31, 2012
Foreign Exchange Option Contracts	Location of gain (loss)	Amount of gain (loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income, net	$	81		$	1
Copper Derivative Instruments
Contracts designated as hedging instruments	Other comprehensive income		(15	)		(21	)

Concentration of Credit Risk

By using derivative instruments, we are subject to credit and market risk.  If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value of the derivative instrument. Generally, when the fair value of a derivative contract is positive, the counterparty owes the Company, thus creating a receivable risk for the Company. We minimize counterparty credit (or repayment) risk by entering into derivative transactions with major financial institutions of investment grade credit rating.